The Youfa Group is one of the top 500 enterprises in China. The company’s products (sold under the YOFA brand name) have been widely used in a number of key projects: the Three Gorges Project, the Capital International Airport, Shanghai Pudong International Airport, the 2008 Olympic Games venues, the 2010 Shanghai world expo exhibition hall and other national major projects. Their products are also exported to more than 50 countries such as the EU, the United States, Australia, Southeast Asia, the Middle East, etc. YOFA steel pipe’s comprehensive domestic market share is more than 15 percent.
Though Chinese finished steel prices have seen some rebound recently, the prices of finished steel have still been at historical low levels. What’s your point of view toward the prospect for the finished steel prices? Will the rebound continue? What’s your opinion on the long-term trend of Chinese steel industry?
HW: China’s steel industry is in an overall oversupply situation now. For instance, In Q1 2014, China’s output of crude steel amounted to 202.7 million mt, up 2.37 percent year-on-year, with the growth down 6.73 percentage points compared to the same period of last year. The average daily crude steel output totaled 2.25 million mt, equaling to an annual output of 822 million mt. Also in the first quarter, China’s crude steel output accounted for 49.97 percent of global crude steel output, down 0.03 percentage points year-on-year. China’s consumption for steel has been at the peak arc zone, with very slow growth, if there is any. Under these conditions, the rebound of finished steel prices will always be temporary and periodical. Moreover, with the gradual declines of iron ore prices, the finished steel prices will lose support from cost side, thus it will also see drops to some extent.
Over the past year, it was not steelmakers alone who faced difficulties, but also traders. What effects on Chinese steel trading have you experienced?
HW: With the development of the steel industry in China, both steelmakers and steel traders face severe competition and need to upgrade their business model. Steelmakers are increasing their direct sales rate, trying to approach downstream users closely. At the same time, traders face the problem of fund shortages, pushing them to adjust their business pattern.
When facing the overly sluggish domestic steel trading industry, what strategy does your company take? With the gradual declines in consumption of finished steel, market participants believe that Chinese steel exports will see an overall rising trend; do you agree with this?
HW: Youfa Steel Pipe has taken advantage of rapid growth over the past few years. Currently, we have production capacity of over 10 million mt, becoming the number one producer in China’s steel pipe industry. We upgrade products, develop quality improvement and marketing enhancement to speed up sales and enhance our company’s competitiveness. As for steel exports, volumes have reached a certain high level. For example, in Q1 China exported 18.33 million mt finished steel, up 27 percent year-on-year, while we think that the growth of exports will slow down in the future.
Market analysts in the raw materials industry believe that global iron ore prices will see an overall declining trend due to increasing production capacity around the world. Do you agree?
HW: We agree with that iron ore prices will see a decreasing trend in the future due to the slow growth of steel production capacity and iron ore entering high production level, which will lead to oversupply in iron ore. China’s demand for iron ore has entered a period of low-speed growth following its high-speed growth in previous years, while the country’s demand for the raw material may increase at a year-on-year rate of 3-4 percent over the long term. According to market insiders, China’s demand for iron ore will increase by 32 million mt in 2014, while domestic iron ore output will rise by 31.2 million mt during the given year, limiting any increase in demand for imported iron ore. Based on demand and supply curve, oversupply will finally result in a decline in prices. Meanwhile, the iron ore producing giants will lose their controlling power on prices due to more and more iron ore producers entering the market. In addition, more and more funds will be brought into iron ore production under the standard mode of financing, which could intensify competition among iron ore enterprises and help the whole industry develop in a positive direction.
The Chinese government set the economic development target at 7.5 percent for 2014. Analysts say that to realize this aim, the government will likely continue increasing investment, what do you think the impact this will exert on steel industry?
HW: The oversupply situation continues in Chinese steel industry, while the leading factors that affect the steel industry are lowering supply by energy conservation and emission reduction, backward production elimination and reducing capacity. The increase of investment could stimulate steel consumption to a certain degree, but only in a short term. The increasing capacity will quickly consume the function of investment.